Long-Term Capital Gains Tax: Rates and Rules

Long-term capital gains are profits from selling assets held for more than one year, and they are taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income. These rates are generally lower than the ordinary income tax rates that apply to short-term gains. The exact rate you pay depends on your total taxable income for the year, with higher-income taxpayers paying the 20% rate on at least some of their gains. Additional taxes, such as the 3.8% net investment income tax, may also apply for high earners.

This guide explains how long-term capital gains are calculated, the current tax rates, special rules for certain assets, and strategies to minimize your tax liability. Always consult a tax professional for advice tailored to your specific situation.

What Qualifies as a Long-Term Capital Gain?

A capital gain occurs when you sell a capital asset for more than its adjusted basis, which is generally what you paid for it. Capital assets include stocks, bonds, real estate, and collectibles. The gain is considered long-term if you held the asset for more than one year before selling. The holding period starts the day after you acquire the asset and ends on the day you dispose of it. For example, if you buy stock on January 1, 2025, and sell it on January 2, 2026, your gain is long-term. If you sell on December 31, 2025, it is short-term and taxed as ordinary income.

Certain assets have special holding period rules. For property received as a gift, your holding period may include the donor's holding period if your basis is the donor's basis. For inherited property, gains are generally considered long-term regardless of how long you held the asset. See IRS Topic No. 409 for more details.

Long-Term Capital Gains Tax Rates

The tax rate on long-term capital gains depends on your taxable income, which includes your capital gains plus other income minus deductions. For 2025, the rates are 0%, 15%, and 20%. The 0% rate applies to taxpayers with lower taxable income, the 15% rate applies to middle-income taxpayers, and the 20% rate applies to high-income taxpayers. The IRS adjusts the income thresholds for these rates annually for inflation.

According to the IRS, for taxable years beginning in 2025, the 0% rate applies if your taxable income is less than or equal to $48,350 for single filers and $96,700 for married couples filing jointly. The 15% rate applies if your taxable income is more than those amounts but less than or equal to $533,400 for single filers and $600,050 for married couples filing jointly. The 20% rate applies to the extent that your taxable income exceeds those thresholds. These thresholds are for 2025 and may change in future years.

It's important to note that these rates apply to your net capital gain, which is your net long-term capital gain reduced by any net short-term capital loss. Short-term capital gains are taxed as ordinary income at rates up to 37%.

Source: IRS Topic No. 409.

Special Capital Gains Rates for Certain Assets

Some long-term capital gains are taxed at higher rates than the standard 0%, 15%, or 20%. According to the IRS, the following exceptions apply:

• Collectibles (such as coins or art): maximum 28% rate.
• Qualified small business stock (Section 1202): the taxable part of the gain is taxed at a maximum 28% rate.
• Unrecaptured Section 1250 gain from selling Section 1250 real property: maximum 25% rate.

These rates apply regardless of your income level. For example, if you sell a painting held for two years at a $10,000 gain, that gain is taxed at up to 28%, not the lower rates.

Additionally, high-income taxpayers may owe the 3.8% net investment income tax (NIIT) on net investment income, including capital gains. The NIIT applies to individuals with modified adjusted gross income above certain thresholds. For more information, see IRS Topic No. 409.

How to Calculate Your Long-Term Capital Gains Tax

To calculate your tax, follow these steps:

1. Determine your net long-term capital gain: subtract long-term capital losses from long-term capital gains. If losses exceed gains, you have a net long-term capital loss.
2. Offset any net short-term capital loss against your net long-term gain. The result is your net capital gain.
3. Apply the appropriate tax rate to your net capital gain based on your taxable income bracket.

For example, suppose you have $20,000 in long-term gains and $5,000 in long-term losses, so your net long-term gain is $15,000. You also have a $3,000 net short-term loss. Your net capital gain is $12,000. If your taxable income (including this gain) is $50,000 as a single filer, the first $48,350 is taxed at 0%, and the remaining $1,650 is taxed at 15%, resulting in $247.50 of tax.

Capital losses can offset capital gains dollar for dollar. If your capital losses exceed your gains, you can deduct up to $3,000 ($1,500 if married filing separately) of the excess against ordinary income each year, carrying forward any remainder. See IRS Topic No. 409.

Strategies to Minimize Long-Term Capital Gains Tax

Several strategies can reduce your tax liability:

• Hold assets for over one year to qualify for lower long-term rates.
• Harvest tax losses: sell losing investments to offset gains, then repurchase similar (but not identical) assets to avoid the wash sale rule.
• Time your sales: if your income is low in a year, you may pay 0% on gains up to the threshold.
• Use tax-advantaged accounts: investments in IRAs or 401(k)s grow tax-deferred or tax-free, avoiding capital gains tax until withdrawal (or never for Roth accounts).
• Donate appreciated assets: if you itemize, donating stock held over a year allows you to deduct the fair market value and avoid capital gains tax.
• Consider the home sale exclusion: if you sell your primary residence, you may exclude up to $250,000 ($500,000 for joint filers) of gain if you meet ownership and use tests.

These strategies have limitations and may not suit everyone. Consult a tax advisor before implementing.

Reporting Long-Term Capital Gains on Your Tax Return

Report capital gains and losses on Form 8949 and Schedule D of Form 1040. You'll need to provide details of each sale, including dates, proceeds, and basis. If you have a net capital gain, you may need to make estimated tax payments to avoid penalties. See IRS Topic No. 409 for instructions.

Keep records of purchase and sale documents to support your basis and holding period. For inherited assets, the basis is usually the fair market value at the decedent's death, which can reduce your gain.

Frequently Asked Questions

How much capital gains tax will I pay on $100,000 of long-term gains?

It depends on your other income. If you are single with no other income, your taxable income is $100,000 minus the standard deduction (about $15,000 for 2025), leaving $85,000. The first $48,350 is taxed at 0%, and the remaining $36,650 is taxed at 15%, resulting in $5,497.50 of tax. If your income is higher, more may be taxed at 15% or 20%.

What is the 3.8% net investment income tax?

The NIIT is an additional 3.8% tax on net investment income, including capital gains, for individuals with modified adjusted gross income over certain thresholds. It applies to the lesser of net investment income or the excess of MAGI over the threshold.

Can I avoid capital gains tax by reinvesting?

Generally, no. Reinvesting gains does not defer tax unless you use a like-kind exchange (for certain real estate) or invest through a tax-advantaged account. However, you can offset gains with losses or hold assets until death, when heirs receive a step-up in basis.

Are long-term capital gains taxed differently for state taxes?

Yes, states have their own rules. Some states tax capital gains as ordinary income, while others have lower rates or no income tax. Check your state's tax agency for details.

Sources

• Capital Gains Taxes: An Overview of the Issues
• Capital Gains Tax Definition | TaxEDU Glossary